Keynes, monetary policy, inflation and imperialism

There is a mechanism at the heart of modern monetary economics that its architects understood well, and its beneficiaries have never had much incentive to explain.

It is the mechanism by which newly created money, conjured through the institutional apparatus of central banking and deficit spending, travels through an economy in a sequence that is not entirely neutral.

The first recipients are often government contractors who receive the newly printed money. By the time it reaches wages, savings accounts, and the fixed incomes of people far from the point of origin, prices have already adjusted upward, and purchasing power has already been extracted. This is not a flaw in the Keynesian system. In a very real sense, it is the system.

John Maynard Keynes was not innocent on this point. In his 1919 masterwork, 'The Economic Consequences of the Peace', he observed that Lenin was said to have declared that the best way to destroy the capitalist system was to debauch the currency, and Keynes agreed that the observation was profound, noting that, by a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

He understood the redistributive violence of monetary expansion with crystalline clarity. What he argued, and what became the operating doctrine of the twentieth-century state, was that this power could be wielded responsibly by enlightened technocrats pursuing the public good.

The developing world, from Pakistan to Sub-Saharan Africa, has spent the subsequent decades demonstrating what happens when those technocrats are also cronies.

The mechanism works as follows. A government facing a fiscal shortfall, or more commonly a political opportunity, instructs its central bank to finance spending through money creation, either directly or through the purchase of government securities.

The money enters the economy at a specific point, typically through contractors, state enterprises, politically connected businesses, or payroll for expanded public sector employment. These first recipients spend the new money before the broader price level has adjusted to reflect the increased supply of currency. They purchase assets, import luxury goods, acquire real estate, or simply convert the domestic currency into dollars and deposit it abroad.

It is only later, as the excess money circulates through successive transactions, that inflationary pressure becomes visible to ordinary citizens through higher food prices, higher rents, and the quiet erosion of whatever savings they have managed to accumulate.

Zimbabwe under Robert Mugabe is the terminal case, the Reductio ad absurdum that economists invoke to illustrate what happens when the printing press operates without any restraint whatsoever.

But the more instructive examples are the subtler ones, where the mechanism works slowly enough that its distributive consequences can be obscured behind technical language and partisan noise.

In Turkey over the past decade, the political pressure applied to the central bank to maintain artificially low interest rates, despite raging inflation, transferred enormous wealth from ordinary Turkish savers and wage earners to politically connected borrowers who had access to cheap credit before the lira collapsed.

In Argentina, a country that has defaulted on its sovereign debt nine times, the pattern has repeated with such regularity that it has become something close to a cultural institution, with the professional class and the well-connected dollarising their wealth at the first sign of trouble while the peso-denominated savings of the poor are wiped out in each successive devaluation.

In Venezuela, the story is starker still, with oil revenues funnelled through a patronage network while hyperinflation reduced the bolivar to something approaching worthlessness for anyone who lacked access to the parallel dollar economy.

What is striking about these cases is not that they are exceptional, but that they are illustrative of a general principle that operates, in milder and more respectable forms, even in the most sophisticated economies.

The quantitative easing programs deployed by the United States Federal Reserve and the European Central Bank in the aftermath of the 2008 financial crisis were, by the orthodox account, emergency measures to prevent a deflationary collapse. What they also accomplished, as a matter of documented economic outcome rather than conspiracy theory, was to inflate asset prices to the considerable benefit of those who already held significant financial assets and real estate, while wages for ordinary workers stagnated for years.

The K-shaped recovery that became a commonplace of economic commentary during the pandemic era was not an accident or a paradox. It was the predictable distributional consequence of an enormous monetary expansion flowing first through financial markets and asset prices before reaching, if it reached at all, those whose wealth consists primarily of their labour.

This brings us to the imperial dimension, which operates by the same logic but at a global scale.

The United States, as the issuer of the world's reserve currency, enjoys what Valéry Giscard d'Estaing famously called an "exorbitant privilege": the ability to run persistent deficits financed by printing dollars that the rest of the world must hold because global trade, commodity markets, and financial contracts are denominated in them.

When the Federal Reserve expands its balance sheet, it is not merely diluting the savings of American citizens but distributing the inflationary consequence across every central bank, sovereign wealth fund, and ordinary household that holds dollar-denominated assets.

Countries that accumulate dollar reserves as a matter of prudent monetary management find that those reserves are quietly eroded each time Washington decides that its domestic political situation requires another round of fiscal expansion.

This is not colonialism in the formal sense of gunboats and governors-general, but as a structure of involuntary wealth transfer enforced not by armies but by the architecture of the international monetary system, the family resemblance is uncomfortable to dismiss.

So, what is the alternative to Keynes?

The Austrian school of economics offers the only coherent theoretical alternative, and it is worth being precise about why. The Hayekian critique of monetary expansion is not simply that it causes inflation in the conventional sense, but that it systematically distorts the price signals through which economic actors coordinate their decisions, creating artificial booms that benefit early recipients of the new money and busts that punish everyone else.

The remedy, in the Austrian framework, is to remove from political authority the power to expand the money supply, through a gold standard, commodity backing, or, more recently, through the hard supply constraints built into Bitcoin's protocol design. If money cannot be created, the temporal arbitrage disappears, the mechanism of stealth transfer is disabled, and savings once again hold their value across time.

The reason this alternative remains confined to academic seminars and libertarian reading groups is not that it is technically incoherent, but that it would require the political class to voluntarily surrender the single most powerful instrument of elite capture that modernity has placed in their hands.

Keynesian economics is not merely an intellectual framework but an elegant system for the private appropriation of public wealth, wrapped in the language of macroeconomic management and the public interest. Keynes himself believed that technocratic wisdom could discipline this power. The historical record suggests he was, on this particular point, an optimist of the most aggressive kind.

So, does Austrian economics have a future in the world and in Bangladesh?

If the US dollar continues to lose ground as the global reserve currency, even if it is not replaced—which I don't think it can be in the near future—we will certainly see certain Austrian-backed thinking take root in America, such as partial gold backing after revaluation of gold on America's books. This is already in Donald Trump's "Big Beautiful Bill," as well as in the Project 2025 documents, which allegedly have informed much of Trump's aggressive break from policies in the past. And if the US begins to adopt such measures, others usually follow suit.

In sum, Austrian-inspired monetary policy will sooner or later find more favour globally. Of that, there is no doubt.

Sketch: TBS

Sajid Amit, PhD, works in international development, academia, and investments and has prior experience at BRAC EPL, Morgan Stanley, and KPMG.